The opinion of the court was delivered by: ACKERMAN
This is a suit against the United States for refund of certain taxes paid for the fiscal years ending in 1970, 1971, 1972, 1973 and 1974. The plaintiff, Supermarkets General Corporation ("SGC"), operated through its Pathmark and Rickels divisions, over one hundred retail stores. During the relevant tax years, the plaintiff was subject to numerous claims of personal injuries and property damage made by its customers. As an accrual basis taxpayer, it sought to deduct as an accrued liability the amount of its maximum uninsured exposure on these claims during the tax years 1971, 1972 and 1973.
In 1971 the Internal Revenue Service ("IRS") disallowed the accrued liability except to the extent that the claims had been satisfied during the tax year, and increased SGC's taxable income accordingly. In 1972 and 1973, SGC claimed a deduction only with respect to claims actually satisfied during those taxable years but requested leave to amend its returns to increase its accrued liability up to its maximum exposure. These requests were denied. Administrative claims for refunds were properly filed and plaintiff filed this suit within two years of notification that the claims were being disallowed.
The case is before me today on cross-motions for partial summary judgment. Plaintiff seeks a judgment that it may properly determine its accrued liability on the basis of the aggregate of the personal injury and property damage claims rather than on a claim by claim basis. Defendant moves for partial summary judgment on the basis that, as a matter of law, the Commissioner did not abuse his discretion in finding that the plaintiff's deduction of its maximum exposure as an accrued liability in each of the relevant tax years was improper. For the reasons which I will set forth below, I have determined that neither motion will be granted, and that plaintiff may prove at trial, if it desires, its right to an accrued liability for each unsettled claim. Summary judgment is appropriate only if, after giving the non-moving party the benefit of all reasonable factual inferences, there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. See DeLong Corp. v. Raymond International, Inc., 622 F.2d 1135 (3d Cir. 1980). In this case, the principal facts are not disputed.
In 1971, 1972 and 1973, plaintiff operated 106, 112, and 118 retail supermarket and home center stores respectively. These stores were patronized by millions of customers and during the course of each of these years, some of these customers filed claims for incidents arising out of their patronage of the stores. In 1971, 4087 such claims were reported; in 1972, 5018 claims were reported; and in 1973, 5301 claims were reported.
SGC was, to some extent, a self-insurer with respect to these claims. Under an insurance policy issued by Insurance Company of North America ("INA"), SGC was responsible for the first $ 10,000 of losses per incident up to a scheduled maximum amount based upon a percentage of SGC's gross sales. Losses in excess of the maximum cap were covered by INA. INA did not handle the processing of these claims. Instead, plaintiff employed a professional claims adjuster service, Employers Self Insurance Service ("ESIS"), to establish claims files, and to investigate, evaluate and process the claims. Among other powers, ESIS was authorized by plaintiff to settle claims between $ 2,000.00 and $ 10,000.00, and to notify the excess carrier (INA) if the claim appeared to be of a value in excess of $ 10,000.00.
At year end, for each of these years, the total amount of the satisfied and/or estimated claims exceeded the maximum self-insurance exposure. From the vantage point of hindsight, it cannot be disputed that the plaintiff actually expended the maximum amount on the claims which arose in each of these years. INA was notified on January 9, 1976, that the maximum amount had already been reached, thereby triggering the excess coverage.
The parties do not dispute that plaintiff is entitled to deduct these uninsured losses. The issue presented in this case is the timing of the deductions. Nor do the parties disagree as to what legal principles govern. The parties only disagree over the application of these general legal principles to the facts of this case.
A taxpayer is required to use the same method of accounting for computing deductions and taxable income as it uses for its business accounts. 26 U.S.C. § 446(a). However, that general rule is subject to the following exception:
If no method of accounting has been regularly used by the taxpayer, or if the method used does not clearly reflect income, the computation of taxable income shall be made under such method as, in the opinion of the secretary or his delegate, does clearly reflect income.
26 U.S.C. § 446(b). The Commissioner, therefore, has broad discretion under the Code to determine whether accounting methods clearly reflect income. The exercise of this discretion must be upheld unless clearly erroneous or without adequate basis in the law. See Thor Power Tool Co. v. Commissioner, 439 U.S. 522, 532, 99 S. Ct. 773, 780, 58 L. Ed. 2d 785 (1979); RCA Corp. v. U.S.A., 664 F.2d 881 (2d Cir. 1981).
The basic rule for determining in which year a deduction should be taken is found in 26 U.S.C. § 461(a) IRS Code of 1954:
The amount of any deduction or credit allowed by this subtitle shall be taken for the taxable year which is the proper taxable year under the method of ...